What lessons does Russia’s economic crisis hold for rising powers?

Russia’s economy is staring down a precipice. Food shortages, rising inflation, much lower standards of living for ordinary citizens, and a recession is lurking on the horizon. There is dark foreboding about the country’s future. As if to add fuel to the flame, at the end of January 2015, Standard & Poor’s cut Russia’s foreign-currency credit rating to junk status. In the face of Russia’s ongoing dissent with the West over Ukraine and very low oil prices, there is no discernible way out. More recently, Western countries have threatened to hit Russia with more sanctions.

In mid-January, I participated on the BRICS and New Development Bank panel at the Gaidar Forum in Moscow. The Gaidar Forum is a shadow of the World Economic Forum, and brings together government officials, business elites, and the policy community in Russia. The theme of Russia’s economic challenges dominated the discussions. In his remarks Prime Minister Dymitry Medvedev acknowledged that the country faces economic challenges ahead, but underplayed their seriousness.

In my conversations with Russian scholars and professionals, it became apparent that there are mixed feelings about the current state of the economy. A number of young and educated Russians are already contemplating immigrating, ironically, to Western countries, as their country sails close to danger. This would further ransack the country of its human capital – a vital resource that it sorely needs to build a different and more enduring future beyond reliance on oil and gas. These cynical Russians expressed deep anxieties about the future of their children in a country fraught with uncertainties.

Yet many other professionals, seized with patriotic fervor, view President Putin as a hero whose efforts to restore Russia’s glory on the global stage are seen as being thwarted by the West. Currently Putin enjoys high popularity ratings in Russia, defying logic in the context of economic headwinds.

For many Russians, the only glaring reference marker of Russia’s economic prosperity and potential greatness in modern times is the period between 1999 and 2007 when Putin lifted the country out of the doldrums and brought economic stability. He helped to efface the humiliation Russia suffered during the tumultuous years of Boris Yeltsin whose reign had America’s seal of approval. To them, Putin is a savior.

Russians’ mistrust of the West, their acute and correct perception of double standards in US foreign policy, and their resentment at what they consider Western encroachment in their region push them to Putin’s bosom. Russians view sanctions as a punishment meted out to their country for staking its place as an equal player among great powers in global affairs.

Many Russians are likely to interpret Obama’s ill-advised gloating over Russia’s economic tailspin during his State of the Union address as yet more evidence of arrogance.

At the Gaidar Forum, Medvedev displayed a mixture of realism and populism. He talked tough on Ukraine, threatening to complicate its economic life by calling on it to fulfill its debt obligations to the tune of US$3bn. He announced a set of policy steps the Russian government will take in the coming months in response to economic challenges: implement import replacement strategy in sectors such as pharmaceuticals and medical equipment; offer government support to agriculture for food security; strengthen macro-economic stability; diversify the economy away from oil and gas, and provide financial support for the development of new industries; and recapitalise banks so they can help boost the economy. Medvedev’s solution for employment creation was less convincing. He said government would encourage free-lancing and work over the internet.

In light of constrained fiscal space, these goals are unlikely to be achieved. Structural weaknesses in Russia’s economy go deep, compounded by infrastructural bottlenecks, corruption, and poorly developed market institutions. Basking in the glory of oil and gas windfalls, Russia has for many years neglected to undertake the necessary reforms to modernise its economy and put it on a competitive footing.

There is a view among some observers that Russians will weather this storm, as the country is familiar with hardship. That is a remote possibility, as low oil prices mean fewer cards for Putin to play to turn the economy around. Further, thinkers such as German Gref, Andrei Illarionov and former finance minister Alexei Kudrin – who were Putin’s brains trust to drive economic reforms – have all been dispatched to the political wilderness. Economic strain may likely harden Putin and drive him to more destructive, populist policies in an attempt to sustain his popularity.

There are three lessons that the Russian crisis holds up for middle-income and rising powers. First, macro-economic stability is important for sustaining confidence in the economy. Second, institutions matter. Countries that have weak institutional foundations will always find it difficult to show resilience in the face of economic storms. Improving institutions also entails dealing decisively with corruption.

Third, foreign policies should be designed to serve long-term national economic interests rather than pursuing wooly ideologies. Importantly, in an interdependent global system, it helps to build bridges across a diverse set of countries rather than taking exclusivist and hostile approaches.

An earlier version of this article was published in Business Day on the 23 January 2015.